Marlin Financial & Leasing Corp. v. Nationwide Mutual Insurance Co.

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

December 4, 2003 Session

MARLIN FINANCIAL & LEASING CORPORATION v. NATIONWIDE

MUTUAL INSURANCE COMPANY

Appeal from the Chancery Court for Hamilton County

No. 01-0722 Howell N. Peoples, Chancellor

No. E2003-01045-COA-R3-CV - FILED JULY 29, 2004

This is a declaratory judgment action filed by Marlin Financial & Leasing Corporation (“Marlin”)

against its insurer, Nationwide Mutual Insurance Company (“Nationwide”), seeking a determination

as to coverage under Marlin’s insurance policy with Nationwide. Specifically, the suit seeks to

obligate Nationwide to pay $8,333.33, the amount of Marlin’s settlement of a claim asserted by

AmSouth Bank (“AmSouth” or “the Bank”), and associated attorney’s fees and expenses of

$52,654.05. The trial court granted summary judgment to Marlin, finding that AmSouth’s claim

against Marlin for “loss of use” of certain property was covered under the business liability feature

of the policy and that Marlin was entitled to reimbursement for the amount of its settlement of

AmSouth’s claim and Marlin’s related litigation expenses. The trial court ultimately awarded Marlin

prejudgment interest, but it refused to assess a bad faith penalty against Nationwide. Nationwide

appeals and both sides raise issues. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

Affirmed; Case Remanded

CHARLES D. SUSANO , JR., J., delivered the opinion of the court, in which D. MICHAEL SWINEY , J.,

joined. HOUSTON M. GODDARD , P.J.,1 did not participate in the Court’s decision.

Parks T. Chastain, Nashville, Tennessee, for the appellant, Nationwide Mutual Insurance Company.

John B. Curtis, Jr., Chattanooga, Tennessee, for the appellee, Marlin Financial & Leasing Company.

OPINION

1

This case was originally assigned to Judge Goddard for the preparation of an opinion. W hen he passed away

on April 2, 2004, the case was reassigned to Judge Susano.

I.

Marlin is in the business of brokering leases among vendors, customers, and financial

institutions. On March 20, 1997, Marlin entered into a lease agreement with Island Cove Marina &

Resort (“Island Cove”) for boat racks and a dry storage building. Prior to entering into the lease,

Marlin arranged for financing through AmSouth Bank. In determining whether to provide financing,

AmSouth relied upon financial information it had received from the owners of Island Cove.

The master lease schedule entered into between Marlin and Island Cove provides, in pertinent

part, as follows:

F. SPECIAL CONDITIONS: . . . (2) Unless otherwise stated in this

Schedule, [Island Cove] is hereby given an option to purchase the

Equipment at the end of the lease term for an amount equal to its then

fair market value.

G. OWNER: The Equipment leased herein is owned by [Marlin]

(referred to in the Lease as “Owner”).

(Capitalization in original).

The master lease agreement entered into between Marlin and Island Cove provides, in

pertinent part, as follows:

* * *

7. EXPIRATION OF TERM AND RETURN OF EQUIPMENT.

Upon the expiration of the term of this Agreement . . . [Island Cove]

shall promptly return the Equipment . . . at its sole expense . . . to

such place as [Marlin] may designate . . . . If [Island Cove] shall

retain possession of the Equipment . . . after the expiration or earlier

termination of this lease, [Island Cove] shall be deemed to be holding

over [on] a month-to-month basis, and all terms hereof shall remain

in full force and effect, including the payment by [Island Cove] of

rent.

[Island Cove] shall make the Equipment available for inspection by

prospective buyers at any reasonable time or times prior to [the]

Expiration or termination of this Lease. At the option of [Marlin],

[Marlin] may keep the Equipment on [the] premises until [Marlin]

shall have leased, sold, or otherwise disposed of the Equipment. . . .

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8. TITLE OF LESSOR: POSSESSION AND USE OF THE

EQUIPMENT. Title to the Equipment shall at all times remain in

[Marlin]. . . .

* * *

17. ASSIGNMENT BY LESSOR. [Marlin] may transfer, sell, or

assign this Lease, title to the Equipment, and/or any rents or other

sums due to become due hereunder, or delegate any of [Marlin’s]

duties hereunder without prior notice to or the consent of [Island

Cove] and in such event [Marlin’s] transferee or assignee shall have

all the rights, powers, privileges and remedies of [Marlin] under this

Lease.

* * *

19. REMEDIES. Upon the occurrence of any Event of Default, and

at any time thereafter so long as the same shall be continuing,

[Marlin] may declare this Lease in default. Such declaration shall be

made by written notice mailed to [Island Cove] at its address

specified above. Upon the mailing of such notice, [Island Cove]

hereby authorizes [Marlin] at any time and from time to time to enter

upon, with or without legal process, any premises where the

Equipment may be located and take possession thereof at [Island

Cove’s] expense. Additionally, upon the mailing of the notice

declaring the Lease in default, [Island Cove], without further demand,

shall pay to [Marlin] an amount equal to any unpaid rentals or other

monies due on or before an Event of Default, plus as liquidated

damages, and not a penalty, at an amount equal to the present value

of all rentals remaining to be paid under the Lease together with the

present value of [Marlin’s] residual interest of the Equipment (as if

no default had occurred) discounted using a simple interest rate per

annum equal to the “Federal Funds Rate” means the average between

the high and low Federal Funds money rate published (as of the date

of the Event of Default (or the next business day)[)] in The Wall

Street Journal such rate representing reserves traded among

commercial banks for overnight use in amounts of one million dollars

or more. If the value of the residual interest of the Equipment is not

specified in the Schedule, it shall be deemed the fair market value of

the Equipment at the end of the term of the Lease. Thereupon,

[Marlin] shall (i) sell the Equipment at a private or public sale, in

bulk or in parcels, with or without notice, and at [Marlin’s] option,

without having to have the Equipment present at the place of sale, or

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(ii) lease, otherwise dispose of or keep idle all or part of the

Equipment subject, however, to its obligation to mitigate damages,

and (iii) at [Marlin’s] option, use [Island Cove’s] premises for any

or all of the foregoing without costs, damages, or otherwise. The

proceeds of sale, lease or other disposition of the Equipment shall be

applied first (1st) to all of [Marlin’s] costs incurred in obtaining

possession of and selling the Equipment, second (2nd), to any unpaid

sums or other monies due [Marlin] under the Lease, including unpaid

rentals, costs, and any indemnification then remaining unpaid; third

(3rd) to the liquidated damages due [Marlin] under this Lease; fourth

(4th) to any incidental damages of [Marlin]; and fifth (5th) any

surplus funds, if any, shall be paid to [Island Cove]. In addition to

any remedies set forth herein or otherwise available at law, [Marlin]

shall also have all the rights and remedies afforded to [Marlin] under

UCC – [L]eases § 47-2A-I 01. et seq., including but not limited to

UCC – [L]eases § 47-1-A-508.

In the event [Marlin] shall be entitled to possession of the Equipment

pursuant to the Section, due to an Event of Default, [Island Cove] (at

its own expense) shall cause the Equipment to be delivered to

[Marlin] at such point or points designated by [Marlin] in accordance

with Section 7. At the option of [Marlin], [Marlin] may keep the

Equipment on any of the premises of [Island Cove] (or where the

Equipment is located) until [Marlin] shall have leased, sold, or

otherwise disposed of the Equipment. For such purposes, [Island

Cove] agrees to use its facilities without charge. [Island Cove] shall

pay [Marlin] all costs and expenses, including reasonable attorney’s

fees, incurred by [Marlin] in exercising any of its rights or remedies

hereunder.

No remedy provided herein is intended to be exclusive, but each shall

be cumulative, and shall be in addition to any other remedy referred

to herein or otherwise available to [Marlin] at law or in equity. The

exercise of any of the remedies provided herein shall not be deemed

to constitute a termination of this Lease unless [Marlin] so notifies

[Island Cove] in writing.

* * *

26. FILING AS TRUE LEASE, SECURITY INTEREST. [Island

Cove] shall execute any such documents or financing statements as

[Marlin] deems to be necessary or advisable and shall otherwise

cooperate to defend the title and interest of [Marlin]. [Island Cove]

agrees to pay all costs of preparing and filing any such

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documentation. . . . It is expressly agreed that any filings or financing

statements shall not be deemed to affect the nature of this Lease as a

true and bona fide equipment lease and/or a Finance Lease, but rather

to give notice to all interested parties of [Marlin’s] interest in the

property. . . .

(Boldface type and capitalization in original) (emphasis added).

Upon entering into the lease, Marlin assigned all of its right, title, and interest in the boat

racks and dry storage building to AmSouth. Marlin then entered into a second lease with Island

Cove on August 28, 1997, for three floating docks. The terms of the second lease are identical to

those of the first lease. As before, AmSouth provided the financing, and in return, Marlin assigned

its right, title, and interest in the docks to the Bank.

The initial lease assignment from Marlin to AmSouth provides, in pertinent part, as follows:

1. [Marlin] hereby assigns to [AmSouth] its entire right, title and

interest in and to that certain Master Lease Agreement (“the Lease”)

. . . between [Marlin] and [Island Cove], together with [Marlin’s]

right to receive all rent and other monies thereunder, and all of

[Marlin’s] right, title and interest in and to any guaranties or other

rights and interests granted to [Marlin] to secure the payments due

under the terms of the Lease. [Marlin] retains the right, title and

interest to any amounts paid by [Island Cove] should [Island Cove]

exercise its option to purchase the Equipment . . . at the end of the

lease term. Should [Island Cove] not exercise this option, [Marlin]

retains the right to take possession of the Equipment and the right to

all proceeds from the sale or other disposition of the Equipment.

The assignment of the August, 28, 1997, lease to the Bank provides, in pertinent part, the following:

1. [Marlin] hereby assigns to [AmSouth] its entire right, title and

interest in and to that certain Master Lease Agreement (“the Lease”)

dated August 28, 1997 and entered into by and between [Marlin] and

[Island Cove], together with [Marlin’s] right to receive all rent and

other monies thereunder, and all of [Marlin’s] right, title and interest

in and to any guaranties or other rights and interests granted to

[Marlin] to secure the payments due under the terms of the Lease.

Subject to Section 2 hereof, [Marlin] retains the right, title and

interest to any amounts paid by [Island Cove] should [Island Cove]

exercise its option to purchase the Equipment . . . at the end of the

lease term. Should [Island Cove] not exercise this option, [Marlin]

retains the right (subject to Section 2 hereof) to take possession of the

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Equipment and the right to all proceeds from the sale or other

disposition of the Equipment.

2. [Marlin’s] right to receive payments from [Island Cove] at the end

of the term of the Lease, as set forth in Section 1, is subject to the

condition that [AmSouth] shall receive full payment of all other

amounts due and owing by [Island Cove] to [AmSouth] under the

Lease. Only after full payment of all amounts due and owing by

[Island Cove] under the Lease to [AmSouth], shall [Marlin] receive

any amounts retained in Section 1.

(Underlining in original). The Addendum to the August 28, 1997, lease assignment provides, in

pertinent part, as follows:

1. Paragraph 1 of the Assignment of Lease dated the 28th day of

August, 1997 by and between [Marlin] and [AmSouth] is amended to

add the following:

“The last two sentences of Paragraph 1 of the

Assignment of Lease, which state that [Marlin] retains

the right, title and interest in and to any amounts paid

by [Island Cove] should [Island Cove] exercise its

option to purchase the equipment and the right to all

proceeds from the sale or other disposition of the

equipment, are subject to and explicitly contingent

upon [Marlin’s] having paid the Loan from

[AmSouth] in full, and such Loan having been duly

cancelled and released by [AmSouth] on its books.

[AmSouth] retains and is granted by [Marlin] all

rights to the equipment and the proceeds thereof until

the Loan from [AmSouth] to [Marlin] has been paid

in full.[”]

2. This Assignment of Lease is unconditional as to AmSouth’s right

to repossess and dispose of the equipment and collect the proceeds

thereof in the event of any default by [Marlin] in the payment of the

Loan from [AmSouth] to [Marlin] during the Lease Term or at any

time prior to final satisfaction of the Loan.

(Underlining in original).

In servicing the leases of the property to Island Cove, Marlin issued checks drawn on

AmSouth to both Island Cove and the vendors who supplied improvements. Marlin then delivered

the checks to Island Cove’s chief manager, who in turn was to deliver the checks to the vendors.

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When Island Cove subsequently filed for bankruptcy, it was discovered that its chief manager had

forged endorsements on some of the vendor checks, resulting in those vendors never receiving

payment for the boat racks or the third floating dock.

It was Marlin’s responsibility to inspect the construction of all of the improvements. Because

of Island Cove’s fraudulent endorsements, not all of the checks earmarked for the dry storage

building were delivered to the vendor, thus making it impossible to determine whose funds had been

used to pay for the building. With respect to the boat racks, they were not installed by the vendor

who had been identified in the lease agreement, and since the checks were not delivered to the

appropriate vendor, there was no way to determine whose funds had paid for the boat racks. The

third of the three floating docks was never constructed.

Island Cove filed for bankruptcy on September 14, 1998, after which no further payments

on the AmSouth loans were made. Thereafter, both R & F Leasing and Pioneer Bank asserted an

interest in the dry storage building and boat racks; additionally, Pioneer Bank claimed at least a

partial interest in the floating boat docks. Island Cove then filed a claim against AmSouth, as

Marlin’s assignee, for the purpose of determining the extent and validity of AmSouth’s interest in

and to the dry storage building, boat racks, and floating docks.

At this point, Marlin persuaded AmSouth to forego joining it as a party to the bankruptcy

litigation in exchange for Marlin’s assistance in establishing the Bank’s ownership interest in the

Island Cove improvements. As a part of this arrangement between AmSouth and Marlin, the parties

entered into a tolling agreement, which preserved the Bank’s right to file suit against Marlin at a later

time.

In the bankruptcy proceeding, a settlement was ultimately achieved. By the terms of the

settlement, AmSouth received a security interest in two floating docks and the right to 25% of the

apportioned sale proceeds attributable to the value of the dry storage building. As a part of the

settlement, AmSouth gave up its interest in one floating dock, 75% of the dry storage building, and

all of the boat racks.

Marlin assisted AmSouth in filing suit against Cornerstone Bank (“Cornerstone”), which had

accepted some of the fraudulently-endorsed checks. The case against Cornerstone was later settled

in mediation. Marlin, as a part of a global settlement, paid AmSouth $8,333.33 to settle any claims

that the Bank had against it.

Prior to the litigation in the bankruptcy and Cornerstone cases, Marlin, in a letter dated

December 11, 1998, had informed its insurer, Nationwide, of the negligence claims being asserted

by AmSouth against Marlin. Nationwide had issued a businessowners insurance policy to Marlin

that was effective from March 7, 1996, until March 7, 1997; Marlin had renewed the policy from

March 7, 1997, through March 7, 1998. The policy’s Businessowners Liability Coverage Form

provided, in pertinent part, the following business liability coverages:

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A. COVERAGES

1. Business Liability

a. We will pay those sums that the

insured becomes legally obligated to

pay as damages because of “bodily

injury,” “property damage,” “personal

injury” or “advertising injury” to

which this insurance applies. We will

have the right and duty to defend any

“suit” seeking those damages. We

may at our discretion investigate any

“occurrence” and settle any claim or

“suit” that may result. . . .

* * *

No other obligation or liability to pay

sums or perform acts or services is

covered unless explicitly provided for

under COVERAGE EXTENSION –

SUPPLEMENTARY PAYMENTS.

* * *

e. Coverage Extension –

Supplementary Payments

In addition to the Limit of Insurance,

we will pay, with respect to any claim

or “suit” we defend:

* * *

(4) All reasonable expenses incurred

by the insured at our request to assist

us in the investigation or defense of

the claim or “suit,” . . . .

* * *

F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS

* * *

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12. “Property Damage” means:

* * *

b. Loss of use of tangible property

that is not physically injured. All such

loss of use shall be deemed to occur at

the time of the “occurrence” that

caused it.

(Capitalization and boldface type in original).

On December 22, 1998, Nationwide gave Marlin’s claim to its employee, Rockwell Dukes,

for investigation. One month later, Nationwide notified Marlin that the issue of coverage was being

investigated, particularly as to the issue of whether a professional services exception applied to

Marlin’s claim. Marlin’s policy contained an exception which provided that Nationwide did not

provide coverage for injuries “due to rendering or failing to render any professional service.” The

policy then contained a list of activities which were not covered under the policy, which included

accounting and legal services, supervisory services, and medical services, among many others.

In October, 1999, the Liability Insurance Research Bureau (“the Bureau”), which researches

and provides opinions to insurance companies on coverage issues, issued an opinion at the request

of Nationwide. It advised Nationwide that the professional services exception contained in the

policy was not applicable to lease brokers such as Marlin. The Bureau reasoned that “[w]hile being

a lease broker requires training, the training is not to the level of specialized intellectual training such

as that of a doctor, lawyer, engineer, or architect.” Two months after receiving the Bureau’s opinion,

Nationwide forwarded Marlin’s case to an attorney and requested a second opinion on the coverage

issue. On February 18, 2000, Nationwide sent a letter to Marlin, advising that it was denying

coverage of Marlin’s claim. Marlin made a second demand for coverage, claiming it was entitled

to reimbursement of legal expenses incurred in assisting AmSouth, as well as reimbursement of the

funds paid to the Bank as part of the settlement in the Cornerstone litigation. Nationwide again

denied coverage.

Marlin filed suit against Nationwide on June 22, 2001, claiming that Nationwide had

breached its insurance contract with Marlin by failing to defend and indemnify it against the claims

of AmSouth. In its complaint, Marlin sought a declaratory judgment of its rights under the

Nationwide policy and asserted that it was entitled to indemnification and reimbursement of

attorney’s fees and expenses; reimbursement of the AmSouth settlement; interest; and costs.

Nationwide answered, denying all liability. Marlin later amended its complaint to assert that is was

entitled to the 25% bad faith penalty, codified at Tenn. Code Ann. § 56-7-105 (2000). Both parties

filed motions for summary judgment.

The trial court filed its initial memorandum opinion and order on July 1, 2002. In that

opinion, the trial court held that the professional services exception in the insurance policy did not

apply to Marlin. The trial court then considered the issue of whether the insurance policy provided

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coverage for attorney’s fees and expenses since no lawsuit was filed against Marlin. The court

concluded that “the actions of Nationwide, through its agent Rockwell Dukes, waived the right to

insist upon a formal lawsuit to trigger coverage and/or created a new contract with Marlin in which

it could not deny coverage on the basis of whether a formal lawsuit had been filed against Marlin.”

In addition, the court held that “the undisputed facts show that Nationwide should be estopped from

insisting that a lawsuit is necessary to trigger coverage.” Finally, the court addressed the issue of

whether the damages sought by Marlin on behalf of AmSouth constitute “property damage” as

defined in the insurance policy. The court held that there were insufficient facts before it to

determine whether AmSouth was the true owner of the property or whether the Bank merely held

a security interest in the property, and therefore, the court concluded that it could not yet rule on the

property damage issue. The court also reserved the issue of Nationwide’s bad faith until the

coverage issue could be resolved.

The trial court filed a second memorandum opinion and order on April 7, 2003, in which it

opined that, contrary to its initial impression, the determination of what constitutes property damage

does not hinge upon whether the agreement between AmSouth and Marlin is a true lease or a

disguised security interest.2 Instead, the court held that AmSouth, as Marlin’s assignee, had the right,

under Marlin’s assignment of its rights to AmSouth, to repossess the property upon Island Cove’s

default. The trial court went on to note, however, that, due to Marlin’s negligence, AmSouth lost

its right to take possession, at least as to some of the property, thereby suffering a “loss of use” of

that property. As this “loss of use” constitutes property damage under the Nationwide policy, the

trial court reasoned that the Bank did indeed suffer property damage, which was covered under the

policy. The trial court went on to address the issue of the bad faith penalty, holding that it was not

appropriate in the instant case. Finally, the trial court held that Nationwide was not liable to Marlin

for prejudgment interest.

Upon consideration of Marlin’s motion to alter or amend the judgment, the trial court

amended its previous judgment to allow for prejudgment interest against Nationwide in the amount

of 10%. From this judgment, Nationwide appeals.

II.

In deciding whether a grant of summary judgment is appropriate, courts are to determine “if

the pleadings, depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law.” Tenn. R. Civ. P. 56.04. Courts “must take the strongest

legitimate view of the evidence in favor of the nonmoving party, allow all reasonable inferences in

favor of that party, and discard all countervailing evidence.” Byrd v. Hall, 847 S.W.2d 208, 210-11

(Tenn. 1993) (citations omitted).

2

Nationwide did not argue below, and does not argue now, that this distinction is important in this case. On

this point, it agrees with the trial court.

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Since summary judgment presents a pure question of law, our review is de novo with no

presumption of correctness as to the trial court’s judgment. Gonzales v. Alman Constr. Co., 857

S.W.2d 42, 44-45 (Tenn. Ct. App. 1993).

III.

Nationwide raises three issues, which issues present the following questions:

1. Is Nationwide liable under the insurance policy for monies paid by

Marlin to AmSouth in settlement of claims asserted by the Bank

against Marlin; and for legal fees and expenses incurred by Marlin?

2. Do the damages suffered by AmSouth fall under the “property

damages” language of the insurance policy issued by Nationwide to

Marlin?

3. Did the trial court abuse its discretion in awarding Marlin

prejudgment interest against Nationwide?

Marlin also raises an issue, i.e., whether the trial court erred in failing to find that Nationwide “was

guilty of bad faith in the handling of Marlin’s request for defense and indemnification.”

IV.

A.

Nationwide first contends that its insurance policy with Marlin does not provide coverage

for the amounts paid to AmSouth to settle its claims against Marlin, nor does the policy cover

Marlin’s legal fees and expenses. In support of its position, Nationwide relies upon the language

of the insurance policy, which provides that it will cover “those sums that [Marlin] becomes legally

obligated to pay as damages because of . . . ‘property damage,’ . . . to which this insurance applies,”

and that Nationwide “will have the right and duty to defend any ‘suit’ seeking those damages.” The

applicable insurance policy defines “suit” as follows:

“Suit” means a civil proceeding in which damages because of . . .

“property damage,” . . . to which this insurance applies are alleged.

“Suit” includes:

a. An arbitration proceeding in which such damages

are claimed and to which you must submit or do

submit with our consent; or

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b. Any other alternative dispute resolution proceeding

in which such damages are claimed and to which you

submit with our consent.

Citing this language, Nationwide contends that its obligation to provide coverage is contingent upon

the condition precedent of the filing of a lawsuit against the insured. Because AmSouth never filed

suit against Marlin, Nationwide claims that it is not liable for Marlin’s legal fees and settlement

costs.

In the seminal case of Bill Brown Constr. Co. v. Glens Falls Ins. Co., 818 S.W.2d 1 (Tenn.

1991), the Supreme Court concluded that an insurer “may be estopped to deny coverage for any loss

by the misrepresentations of its agent upon which the insured reasonably relies.” Id. at 12. In

expounding on its pronouncement, the court stated that it

reaffirm[ed] the long-standing rule in Tennessee that any contractual

provision of a policy of insurance, whether part of an insuring,

exclusionary, or forfeiture clause, may be waived by the acts,

representations, or knowledge of the insurer’s agent.

Id. at 13 (emphasis in original).

On January 25, 1999, Marlin’s attorney, John B. Curtis, Jr., wrote a letter to Dukes of

Nationwide summarizing the events surrounding AmSouth’s potential claim against Marlin. The

tolling agreement between Marlin and AmSouth had not yet been executed. Dukes was questioned

by Curtis about the letter during his deposition:

Q: All right. And did you receive a letter from me dated January 25

concerning this particular claim?

A: Yes.

* * *

Q: [Were you] advised in this letter that AmSouth had indicated an

intention to name Marlin as an adverse party in the bankruptcy

proceedings or a separate proceeding[?]

A: Yes.

Q: And were you advised at this time that we had persuaded

AmSouth to forego any adversary proceeding as to Marlin until the

dispute regarding ownership of the leased property was resolved?

A: Yes.

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Q:Was it explained to you that the purpose of that was to avoid

unnecessary attorney fees and to possibly avoid litigation down the

line if we were able to prove ownership of the property?

A: I believe that was the explanation given.

Q: Were you also advised in this letter about AmSouth’s willingness

to proceed in this fashion only if Marlin would execute a tolling

agreement as to any statute of limitation?

A: Yes.

Q: Were you advised that it was thought best to have counsel present

during any involvement between AmSouth and Marlin because of the

potential for AmSouth filing a claim somewhere down the line

against Marlin?

A: Yes.

* * *

Q: Were you asked in this letter to give your thoughts regarding the

proposed tolling agreement?

A: Yes.

Q: And the P.S. acknowledges that we had a conversation on January

25 and that you indicated we should proceed with execution of the

tolling agreement?

A: Yes.

Q: Do you recall having that conversation?

A: I recall speaking to you, but I do not recall specifics.

Q: Do you recall the topic of the tolling agreement coming up in our

discussion?

A: I do remember something about the tolling agreement.

Q: Do you recall a discussion to the effect that it would be wise to go

ahead and execute the tolling agreement in order to avoid a lawsuit by

AmSouth at that point in time?

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A: I believe so.

Q: Do you recall a discussion to the effect that these attorney fees in

defense of Marlin would be incurred in any event; and that if it was

later deemed that there was coverage, that Nationwide could simply

reimburse that expense?

A: I believe that was the agreement, that if there was coverage, we

would reimburse; if there wasn’t, we wouldn’t. And at that time, we

were uncertain as to whether coverage applied or not.

Q: And did you think it was best that we enter into the tolling

agreement at that time in order to avoid the immediate lawsuit and the

fees that would be incurred as a result?

A: I believe so.

Based upon Curtis’ letter to Dukes and their conversation of January 25, 1999, it was

reasonable for Marlin to believe that the failure of AmSouth to bring suit would not be, in and of

itself, a bar to coverage. As the trial court stated, while Nationwide had informed Marlin from the

outset “that the issue of coverage was under investigation,” it had “never informed Marlin that the

basis for the denial would be that a formal lawsuit had never been initiated.” Indeed, Marlin was

initially informed that the coverage investigation revolved around the professional services

exception. Nationwide later stated – in a letter dated February 18, 2000 – that the nature of

AmSouth’s damages might also be excluded, and that other unidentified exclusions could apply.

Significantly, none of this specifically advised Marlin that Nationwide was relying upon the policy

requirement that suit be filed. Furthermore, Nationwide’s reliance on this provision is totally

inconsistent with its reaction to the tolling agreement as fleshed out by the Curtis/Dukes’ discussion

regarding that agreement and the surrounding circumstances.

We agree with the trial court that Nationwide waived the lawsuit requirement through the

words, action, and non-action, of its agent, Dukes. As the trial court stated, “[i]f Nationwide did not

intend to provide coverage based on the fact that AmSouth had not filed a lawsuit against Marlin,

a requirement that is expressly stated in the written policies, it should have consistently informed

Marlin that no expenses would be covered until a formal lawsuit was brought against Marlin.”

Furthermore, we agree with the trial court that the doctrine of estoppel prevents Nationwide

Insurance from relying on the lawsuit provision. Finding the trial court’s analysis of the estoppel

argument to be quite well-reasoned, we will quote from it liberally and adopt it as our own:

Marlin informed Nationwide of the situation and sought approval for

the actions it was taking and the expenses it was incurring. This was

done at a very early stage in the litigation. Mr. Dukes represented

that the expenses would be reimbursed if coverage was not denied.

Marlin relied on the statement and incurred additional fees and

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expenses. Nationwide was fully aware that Marlin was incurring

expenses. Further, Nationwide was notified of Marlin’s situation in

December of 1998. It did not send Marlin a letter detailing the

possible exclusions until February 18, 2000. During this time it was

aware that Marlin was incurring expenses. Yet Nationwide did not

inform Marlin that the lack of a formal lawsuit would preclude

coverage, regardless of whether Marlin had coverage. The time lag

between the time Marlin first contacted Nationwide in [late] 1998

and early 1999 until Nationwide gave Marlin a formal statement of its

position in February of 2000 is another reason why Nationwide

should be estopped from asserting the lawsuit provision. An

insurance company cannot tell an insured that expenses related to

avoiding expensive litigation will be paid, then sit back for months

while the insured’s expenses mount, and hope that the lawsuit settles

so that the insurer can escape without expending any costs.

In short, Nationwide cannot have its proverbial cake and eat it, too. We hold that Nationwide

waived the lawsuit requirement in Marlin’s insurance policy, and alternatively, that Nationwide is

estopped from asserting the suit requirement provision. Accordingly, Nationwide is liable to Marlin

for its settlement costs, as well as its legal fees and expenses, provided the damages claimed by

AmSouth constitute covered “property damage” under the terms of the policy. We now turn to the

second of Nationwide’s three issues, i.e., whether AmSouth’s damages are covered damages under

the policy.

B.

Nationwide asserts that AmSouth sustained an “economic loss” and that its policy does not

cover economic loss. More specifically, it contends that “loss of use” as defined in the policy does

not encompass the type of loss suffered by the Bank. This argument requires us to examine

Nationwide’s policy and to do so under the strictures of the well-established principles of contract

construction.

In interpreting contracts of insurance, we must, as a general rule, apply the same rules of

construction as are applicable to other types of contracts. See McKimm v. Bell, 790 S.W.2d 526,

527 (Tenn. 1990). Such contracts are to be interpreted as they are written – absent any fraud or

mistake – and their terms must be given their plain and ordinary meaning. Swanson v. Mid-South

Title Ins. Corp., 692 S.W.2d 415, 419 (Tenn. Ct. App. 1984). The law is well-settled in this state

that any uncertainties or ambiguities in an insurance policy “must be construed strongly against the

insurer and in favor of the insured.” Travelers Ins. Co. v. Aetna Cas. & Sur. Co., 491 S.W.2d 363,

366 (Tenn. 1973). However, the finding of an ambiguity does not end our inquiry. “Even if

ambiguous, the questioned language must be susceptible to a reasonable interpretation,” which

would favor the party “seeking coverage under the policy.” Allstate Ins. Co. v. Barnes, 896 S.W.2d

565, 571 (Tenn. Ct. App. 1995) (emphasis in original) (citing Tata v. Nichols, 848 S.W.2d 649, 651

(Tenn. 1993)).

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When we look at the policy in the instant case, we are struck by the dearth of definitional

language pertaining to the concept of “loss of use.” The policy provides that it covers two types of

“property damage,” i.e., “[p]hysical injury to tangible property, including all resulting loss of use of

that property” and “loss of use of tangible property that is not physically injured.” It is clear that the

boat racks, floating docks, and dry storage building are “tangible property” and it is likewise clear

that none of the property under discussion suffered “physical injury.” Thus, our focus is upon

whether AmSouth lost the use of the boat racks, a significant part of the dry storage building, and

one floating dock.3 No issue is made with respect to Marlin’s negligence.

In the instant case, Island Cove, the lessee of the property, brought about an “occurrence of

[an] Event of Default” under paragraph 19 of the leases when it filed for bankruptcy protection.

Nationwide does not contend otherwise. Under the leases assigned to AmSouth, that bankruptcy

gave AmSouth the right to “take possession” of the property and the right to “sell” it or “lease,

otherwise dispose of or keep idle all or part of the Equipment subject, however, to its obligation to

mitigate damages.” The issue before us is whether these contractual rights gave AmSouth the right

to “use” the property as the word “use” is found in the concept of “loss of use.”

When we examine the policy and particularly the definitional part of this insurance contract,

we are struck by the fact that loss of use is not defined in any way. It certainly is not defined in a

way that would exclude “economic loss” from its reach.

Since the policy does not define the concept of “loss of use,” we must give those words their

“usual, natural and ordinary meaning.” See Swanson, 692 S.W.2d at 419. To aid us in this task, we

turn to the dictionary. See Am. Justice Ins. Reciprocal v. Hutchison, 15 S.W.3d 811, 815 (Tenn.

2000); Tata, 848 S.W.2d at 653. The word “use” is defined as “[t]o put into service or apply for a

purpose.” The American Heritage College Dictionary 1486 (3d ed. 2000). “Loss” is defined as

“[t]he condition of being deprived . . . of something.” Id. at 801. Thus, as applied to the policy

language before us and considering the operative facts, it appears that, given the ordinary meaning

of these words, “loss of use” means the deprivation of the ability to put the boat racks, the missing

floating dock, and the dry storage building into service or apply them for a purpose.

Nationwide strenuously contends that it did not intend to cover “economic loss;” but it can

point to no language in the policy spelling this out. We recognize one could argue that “loss of use”

is a vague term and hence somewhat ambiguous. This does not help Nationwide. As the author of

the policy, Nationwide had it within its power to define loss of use in a way that would exclude

“economic loss.” It failed to do so. Thus, any ambiguity must be construed against Nationwide and

in favor of Marlin, provided there is a reasonable interpretation of the “loss of use” language which

would provide coverage for AmSouth’s loss. See Allstate, 896 S.W.2d at 571.

3

The one floating dock whose utility was lost by AmSouth was lost because it was never constructed.

Nationwide argues that this dock – never having been built – cannot constitute “tangible property.” Even if this be the

case, it is clear that the other property, the use of which was lost due to Marlin’s negligence, does constitute “tangible

property.”

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The lease is very clear. Once Island Cove filed for bankruptcy, AmSouth had the right to

take physical possession of all of the subject property. In other words, according to the dictionary,

it had the right to possess the property and “put [it] into service” or “apply [it] for a purpose.” While

it was required to do certain things with the property in order to mitigate its damages, this does not

change the fact that it had the right to use the property, i.e., the right to sell it or “lease, otherwise

dispose of or keep idle all or part of the” property under discussion. It lost that right, at least as to

some of the property, because of the negligence of Marlin.

Thus, there is a reasonable interpretation of the policy that would cover AmSouth’s loss.

Since the insurance company chose not to define the somewhat-vague term of “loss of use,” that

failure is construed against Nationwide and in favor of an interpretation of the policy favorable to

Marlin.

Nationwide relies on a number of cases from other jurisdictions to support its position that

this case involves economic loss and that “property damage,” under the language of the Nationwide

policy, does not include economic loss. All of these cases are distinguishable from the case at bar.

In L. Ray Packing Co. v. Commercial Union Ins. Co., 469 A.2d 832 (Me. 1983), the

Supreme Judicial Court of Maine held that “loss of profits” did not fall within the property damage

language in a liability policy with provisions not dissimilar to those in the instant case. Id. at 835-36.

The court in L. Ray noted that the underlying suit was an antitrust action brought under the federal

Clayton Act. Id. at 835. The court relied on a case from the United States Supreme Court and noted

that it was “compelling authority that antitrust actions do not allege property damage.” Id. (citing

Chattanooga Foundry and Pipe Works v. City of Atlanta, 203 U.S. 390, 51 L.Ed. 241, 27 S.Ct. 65

(1906)). The holding in L. Ray is not implicated by the facts of the instant case.

In Liberty Bank of Mont. v. Travelers Indem. Co., 870 F.2d 1504 (9th Cir. 1989), the United

States Court of Appeals for the Ninth Circuit, applying Montana law, addressed a coverage issue

under a policy with “property damage” provisions functionally identical to those in the case at bar.

Id. at 1508. In Liberty Bank, the plaintiff had been sued in the underlying litigation for conduct

which allegedly “‘denied [the claimants] their right to claim a security interest’ against the increase

in the value of the inventory.” Id. The claimants had charged that they invested money in one of

the bank’s customer based upon the bank’s commitment that, if the claimants invested additional

money in the customer who was then in default to the bank, “the bank would subordinate its security

position in the inventory and accounts receivable to the extent that they appreciated in value after

September 1, 1981.” Id. at 1505. When the bank “repudiated its subordination agreement” and

foreclosed its security interest to the detriment of the claimants, they successfully sued the bank. Id.

The plaintiff in Liberty Bank sued its insurance company on the theory that the claimants’

claim in the underlying action fell within the property damage coverage of the plaintiff’s liability

policy with the defendant. Id. at 1505. The court in Liberty Bank held that the claim for which

coverage was being sought did not involve a loss of use of tangible property. Id. at 1509.

While Liberty Bank is similar to the case at bar, there are significant differences which

distinguish it from the instant case. First, Liberty Bank does not set forth the language of the

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document(s) upon which the claimants relied to sustain their rights in that case. We have the

documents in this case and they clearly permit AmSouth to take and utilize the property in one of a

number of ways. Furthermore, Liberty Bank does not attempt to analyze “loss of use” in terms of

the usual and ordinary meaning of those words. We do not find this case persuasive authority for

Nationwide’s position in this case.

Nationwide relies on other cases which we also do not find persuasive. See USX Corp. v.

Adriatic Ins. Co., 99 F. Supp. 2d 593, 617 (W.D. Pa. 2000) (finding no coverage where, in the

underlying case, “liability was imposed for the loss of intangible property, i.e., the ability to compete

and generate profits, gain investment values and increase productivity”); Vogel v. Russo, 613

N.W.2d 177, 179 (Wisc. 2000) (holding that a comprehensive general liability insurance policy with

property damage provisions similar to those in the case at bar did not provide “coverage for

diminution in value of a home that resulted from [the insured’s] faulty masonry work”); Wisc. Label

Corp. v. Northbrook Prop. & Cas. Ins. Co., 607 N.W.2d 276, 278 (Wisc. 2000) (holding that there

was no “property damage” where the loss involved occurred as a result of the mislabeling of

products which in turn “caused the products to be sold at less than half of their intended retail

price”). See also Safeco Co. v. Andrews, 915 F.2d 500 (9th Cir. 1990); Comm. Union Ins. Co. v.

Image Control Prop. Mgmt., 918 F. Supp. 1165 (N.D. Ill. 1996); Fireman’s Fund Ins. Co. v. Nat’l

Bank for Coops., 849 F. Supp. 1347 (N.D. Cal. 1994); Ticor Title Ins. Co. v. Employers Ins., 48

Cal. Rptr. 2d 368 (Cal. Ct. App. 1995); Standard Fire Ins. Co. v. Chester-O’Donley & Assoc., 972

S.W.2d 1 (Tenn. Ct. App. 1998) (decided under Kentucky law). None of these cases involve facts

that are similar to the facts in the instant case.

In the instant case, we are dealing with a claim by a third party for a loss that we have found

is covered under the applicable policy language as interpreted under well-established precedent.

Nationwide’s argument pertaining to “economic loss” is a “red herring” in this case. AmSouth’s

claim was based upon its inability, because of Marlin’s negligence, to “use” some of the property

it had a right to use under the assigned contract documents. In our judgment, it matters not, under

the language of the policy before us, how AmSouth was going to use the property; what matters is

that it had a right to use property and that right was lost due to Marlin’s negligence. The cited cases

are of no help to us in resolving the questions now before us. They simply are not implicated by the

facts of the instant case.

C.

Finally, Nationwide argues that the trial court erred in awarding Marlin prejudgment interest

of 10%. We disagree.

The decision of whether to award prejudgment interest is within the sound discretion of the

trial court and will not be disturbed by an appellate court absent “a manifest and palpable abuse of

discretion.” Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998). “A trial court acts

within its discretion when it applies the correct legal standard and reaches a decision that is not

clearly unreasonable.” Bogan v. Bogan, 60 S.W.3d 721, 733 (Tenn. 2001). In the instant case, the

trial court, relying upon the authority of Myint, determined that an award of prejudgment interest was

necessary in order to fully compensate Marlin “for the loss of the use of funds to which it was legally

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entitled.” We cannot say that this decision was “clearly unreasonable.” See Bogan, 60 S.W.3d at

733. We find no abuse of discretion in the trial court’s award of prejudgment interest.

D.

Marlin contends that the trial court erred in failing to find that Nationwide was guilty of bad

faith in its handling of Marlin’s claim. We disagree.

Tenn. Code Ann. § 56-7-105(a) provides the following:

The insurance companies of this state, and foreign insurance

companies and other persons or corporations doing an insurance or

fidelity bonding business in this state, in all cases when a loss occurs

and they refuse to pay the loss within sixty (60) days after a demand

has been made by the holder of the policy or fidelity bond on which

the loss occurred, shall be liable to pay the holder of the policy or

fidelity bond, in addition to the loss and interest thereon, a sum not

exceeding twenty-five percent (25%) on the liability for the loss;

provided, that it is made to appear to the court or jury trying the case

that the refusal to pay the loss was not in good faith, and that such

failure to pay inflicted additional expense, loss, or injury including

attorney fees upon the holder of the policy or fidelity bond; and

provided further, that such additional liability, within the limit

prescribed, shall, in the discretion of the court or jury trying the case,

be measured by the additional expense, loss, and injury including

attorney fees thus entailed.

Before a plaintiff may recover a penalty pursuant to this provision,

(1) the policy of insurance must, by its terms, have become due and

payable, (2) a formal demand for payment must have been made, (3)

the insured must have waited 60 days after making his demand before

filing suit (unless there was a refusal to pay prior to the expiration of

the 60 days), and (4) the refusal to pay must not have been in good

faith.

Palmer v. Nationwide Mut. Fire Ins. Co., 723 S.W.2d 124, 126 (Tenn. Ct. App. 1986); Walker v.

Tennessee Farmers Mut. Ins. Co., 568 S.W.2d 103, 106 (Tenn. Ct. App. 1977). The plaintiff has

the burden of proving the insurer’s bad faith. Palmer, 723 S.W.2d at 126.

The trial court found that “[g]iven all of the facts and circumstances of this case,” there were

“legitimate ground[s] for disagreement about the coverage of the insurance policy and that

Nationwide should not be burdened with the statutory penalty.” The imposition of a statutory

penalty upon an insurer is discretionary with the trial court and, absent an abuse of that discretion,

will not be disturbed on appeal. Daugherty v. Stuyvesant Ins. Co., 169 Tenn. 300, 86 S.W.2d 1095,

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1096 (1935). After reviewing the record, we cannot say that the trial court abused its discretion in

refusing to impose the bad faith penalty.

V.

The judgment of the trial court is affirmed. This case is remanded for enforcement of the trial

court’s judgment and for collection of costs assessed below, all pursuant to applicable law. Costs

on appeal are taxed to the appellant, Nationwide Mutual Insurance Company.

_______________________________

CHARLES D. SUSANO, JR., JUDGE

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